Elizabeth Warren: Libor fraud exposes a rotten financial system

Elizabeth Warren chaired the TARP Congressional Oversight Panel from 2008 to 2010. She is the Democratic nominee for a U.S. Senate seat in Massachusetts.

The Libor scandal is more than just the latest financial deception to come to light. It exposes a fraud that runs to the heart of our financial system.

The London interbank offered rate is a benchmark for a range of interest rates, and the misdeeds making headlines have to do with how those rates are set. If insiders can manipulate the basic measurement of a loan — the interest rate — there is rot at the core of the financial system.

The British financial giant Barclays has admitted to manipulating the rate from 2005 to at least 2009. When the bank made a bet on the direction in which interest rates would turn, the Barclays employees who submit data for calculating interest rates would fake their numbers to help Barclays traders win the bet. Day after day, year after year, bet after bet, Barclays made money by fixing bets for its own traders.

We don’t know who else was fixing bets. Other big banks, including some of the largest in the United States, are under investigation. Barclays doesn’t appear to have acted alone, and it is clear that its fixes weren’t secret deals by rogue traders. Traders put requests to manipulate the rates in writing and even joked about delivering champagne to those who helped them.

It is also clear that many of those who didn’t have a fixer — including consumers, community banks and credit unions — lost money. Barclays padded its bottom line by taking money from everyone else. It won when it shouldn’t have won — and others lost when they shouldn’t have lost. The amount of money involved is staggering. On any given day, $800 trillion worth of credit-related transactions are linked to Libor rates.

In most markets, consumers could simply take their business elsewhere once they learned that the scales were rigged. But interest rates are different. Everyone who borrows money on a mortgage, credit card, student loan, car loan or small-business loan — basically, everyone — is affected by a crooked market on Libor. According to the Federal Reserve Bank of Cleveland, in 2008 more than half of all adjustable-rate mortgages were linked to Libor. Even those who didn’t borrow but saved for retirement or their children’s future got hit with interest rates that had been faked.

It gets worse. During the financial crisis, Barclays and other banks also appear to have consistently manipulated Libor to show lower-than-real borrowing rates to convince the world — and their regulators — that the bank was stronger than it really was. In other words, they rigged the interest-rate reports so that no one would know exactly how much trouble they were in.

With a rotten financial system once again laid bare to the world, the only question remaining is whether Wall Street has so many friends in Washington that meaningful reform is impossible.

Real accountability would mean prosecuting the traders and bank officials who violated federal laws and prosecuting the executives who knew what they were up to. It would mean forcing executives to pay back any inflated compensation that was based on padded profits.

Going forward, the rules would be changed so that Libor is calculated on actual borrowing costs, not estimated or claimed costs. And enforcement agencies would have the resources they need to launch investigations, to fight the armies of private lawyers the banks hire and to prosecute the law-breakers.

But the heart of accountability lies deeper. It rests on acknowledging that we cannot trust Wall Street to regulate itself — not in New York, London or anywhere else. The club is corrupt. When Mitt Romney says he will move to repeal all of the new financial regulations, he supports a corrupt system. When members of Congress grill regulators for being too tough on Wall Street and slash the budgets of the regulators charged with overseeing Wall Street, they prop up a corrupt system.

Financial services are critical to the economy. That’s why everyone — every family and every business — has a stake in an honest system. The fantasy that reducing oversight of the biggest banks will make us safer is just that — a dangerous fantasy. The Libor fraud exposes rot at the core. Now, who will stand up to fix it?